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PQR Co has a demand of 7500 units per month.Each unit costs $5 ordering costs are $100 per orderand the inventory holding cost is 10%of purchase price per year.There is a lead time of 4 weeks between placing an order and recieving delivery.What is the EOQ(to the nearest unit)???
ans 8485 units how????I assume that you are copying this question from our mock exam.
If you are then the correct answer is not 8,484!! (I have just checked again, and it is showing the correct answer as being 6,000 units)
It is arrived from using the EOQ formula with D = 7500 x 12 = 90,000; Co = 100; and Ch = $0.50
(8,485 is one of the choices available, but it is not showing as the correct answer at the end of the text. The correct answer is 6,000 units. Also, the same information appears twice – the other question asks for the reorder level and the correct answer to that is 7,397 units)
Dear John,
Can you please provide working for 6,000 Units.
The EOQ is 13,416 right ?
I think you have misread both the original question and my reply!!
As I wrote, the correct answer is that the EOQ is 6,000 units.
EOQ = square root of (2 x 90,000 x 100)/0.5 = 6,000 units
Dear John,
Please advice why we have used 5% holding cost and not 10% in this question ?
I agree in calculation the holding cost we divide it by 2 by I never come across where we have used half holding cost in calculation EOQ.
I have not used 5% holding cost!!!
The holding cost is 10% of the purchase price. The purchase price is $50 and therefore the holding cost is 10% x $5 which is $0.50 per unit per year.
We do not use half the holding cost!
Hi John
I answered this question, ignoring the lead time, as I didn’t know what to do with it. I got the 6000 correct, but just wondering why the lead time was included?
I know that lead times are relevant in determining minimum quantity, but I spent a few minutes wondering what to do with the information. Is it just a trick to make the question look tougher, or is there a rational for ignoring the lead time?
The lead time has no relevance to the calculation of the EOQ.
(It is typical of the examiner to include information that is not relevant, to test that you know what is relevant 🙂 )
Good Evening John,
I hope you’re well
Rather than reposting again, how do we get the reorder level of 7397 units for the other question?
Aaron
Hi john
Please can you explain how to work out the reorder level, I got EOQ as 6000, but couldn’t work out the reorder level, thanksThe demand per year is 12 x 7500 = 90,000
Therefore the average demand per day is 90,000/365
The lead time is 30 days (the question in the test says 30 days – not 4 weeks which was in the original post here).
So they need to reorder when they still have 30 x 90,000/365 = 7,397 units
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